South Africa sucks when it comes to saving. Our savings rate is a pitiful 13% of GDP, compared to China’s 50% and Nigeria’s 50%. And households – the ordinary man or woman in the street – are the worst savers of all. In fact, South African consumers hardly save a cent, burdened as they are with debt, which is why so many people find themselves unprepared when they get to retirement age.
I like the idea behind the One Rand Family. Okay – nobody wants to be paid their monthly salary in R1 coins – you’d feel like you got change for a R200 note at the mall’s parking meter – but there are valuable lessons to learn when you treat money as a finite commodity and not as limitless credit waiting to be used when you swipe your card. I think Londiwe and Sibusiso and their kids are going to learn a lot through the social experiment – by the looks of things, they already are.
But to come back to the idea of savings, let’s take this true story that Charmain Lines shared with me. Sixteen years ago, Charmain was working as a communication officer for Eskom and thought it was time she started saving some of her earnings. She decided to put away R1 a day (R30 a month) into an investment fund and hardly felt the difference when the money was deducted from her account every month.
For years, she never heard from the investment company after it changed hands. “About a year ago, I suddenly started receiving statements from the new company,” she says. “You can imagine my surprise when I discovered that my R30-a-month investment was now worth R16 652.”
It’s a story that goes to show how saving a little over time really does add up. Einstein called compound interest (interest earned on interest) the eighth wonder of the world. “He who understands it, earns it,” he said. “He who doesn’t, pays it.”
Certified financial planner Kris Erasmus says it’s important that you start thinking early on in your career about saving for your retirement. “In today’s money, you need almost R1 million to provide you with an income of R4 000 per month in the 20 years of your retirement, so it’s imperative that you start saving now,” he says. South Africans are notoriously poor savers, but if you buck that trend, you stand to reap the benefits of interest working in your favour.
What can R1 a day get you?
“With saving a rand a day (R30 per month), you can earn 5.7% interest per year in a money market fund which would keep in line with inflation, so after one year you would have saved R370,” explains Erasmus. “After five years you would have saved R2 079; R4 850 after ten years; R8 541 after 15 years; and R13 457 after 20 years.”
What can R5 a day get you?
“If you can afford to save R5 a day (R150 a month) and choose a higher-yielding investment option like unit trusts which can earn 10% a year, then your potential returns look a whole lot better,” explains Erasmus. According to his calculations, saving R150 per month at 10% for one year will earn you R1 885; R11 616 after five years; R30 727 after ten years; R62 171 after 15 years; and R113 905 after 20 years.
A good education costs money
Everyone wants their children to have the best education possible, but we all know that it costs money. It’s frightening how much school and tertiary fees are increasing every year. Most schools push up by about 9% a year, way above the rate of inflation, which means that the earlier you start saving for your child’s education, the better.
For R150 a month, you can invest in a basic savings fund from a bank or insurance company. “When selecting a plan, the desired level of education and duration of studies will determine the amount to be saved,” says Orah Ndumela, consumer education specialist at Hollard Insurance. She says additional factors such as tuition, books, accommodation, annual education cost escalation, the inflation rate and the different costs of tertiary education must also be taken into account.
Saving up to buy appliances
When you’re thinking of buying a new lounge suite, it’s tempting to dip into credit or buy it on hire purchase. How many people actually save up before they splash out and buy something expensive for their home? But really that’s what we should be doing, especially if you consider that by a lounge suite worth R6 500 on hire purchase, you could end up paying almost double for it, even though spending R300 a month to pay it off over three years doesn’t seem like such a big deal.
Okay, so here’s the number crunching part: assuming a modest interest rate of 5.7% a year, by saving R1 a day, you could buy a fancy new stainless steel cordless kettle after one year of saving (for R370), a top-of-the-range microwave after five years (for R2 000), a wide-screen LED TV after ten years (for R4 800) and a metallic state-of-the-art fridge with auto water and ice dispenser after 20 years of saving (for R12 000).
I like the way the Good Book puts it: “Those who save money little by little make it grow.” Let’s have the courage to save up for our dreams – a world cruise, maybe, or a course that will enrich your career – and the discipline to see it through.
A shorter version of this article appeared in the May 2015 issue of the Jet ClubCard magazine.